Allan Roth: Lessons From a Decade of Simplicity

Our columnist reflects on the ETFs he recommended in his first column 10 years ago.

Reviewed by: Kent Thune
Edited by: Ron Day

It was recently pointed out to me by Ron Day, my editor, that I had penned my first piece a decade ago. Entitled “Simple ETF Strategies Work,” I argued for a three-fund portfolio comprised as follows: 

The logic was, as close as possible, to own every publicly held company on the planet and all U.S. investment grade fixed-rate bonds. I called it the second grader portfolio. It was a very different strategy back then when the rage was smart beta, master limited partnerships, and alternative asset classes such as managed futures.

How did the funds perform? See below.

Vanguard ETFs: Simple Portfolio Performance

Vanguard ETFs Portfolio Performance

U.S. stocks, of course, were the stars, nearly tripling in value vs. international which only gained about 50%. Bonds only gained about 20% and matched the annual SEC yield for part of that decade. 

The returns were anything but stable. We survived the COVID crash where U.S. stocks plunged 35% in the 33 days ending on March 23, 2020. It was hard writing back then to stay the course as the predictable “this time it’s different” phrase ruled the day. It was even harder to rebalance at that time, though it paid off far faster than I imagined.

Vanguard ETFs Portfolio Performance - 2

Looking at the previous chart, keep in mind that the year 2022 was the worst year in the history of the bond market. Statistically, the 13.11% loss was as improbable as the stock market plunge during the great depression. I’m not minimizing the loss but look how stable high-quality bonds are compared to stocks. Still, in early 2022, when the yield curve flattened, I wrote a piece called “Fixed Income; New Game, New Rules” recommending some shorter-term Treasuries. 

How did the pure three fund portfolio do? I looked at three allocations. I’ve long written about rebalancing, so simply rebalancing semi-annually, on June 30 and December 31, had the following results. These funds had gains ranging from 50% to 123%.

Vanguard ETFs Portfolio Performance - 3Vanguard ETFs Portfolio Performance - 4

Decade of Vanguard ETFs: Key Takeaways

There are a few lessons from this past decade.

  1. Stocks can underperform for very long periods of time—far longer than any ten-year period. In early 2020, all three portfolios had nearly identical returns. In fact, that was true since the start of the century beginning January 1, 2000.
  2. Bonds provide ballast. The differences in volatility are quite large. Stock index funds have more risk in a day than high quality bonds have in a year. 
  3. U.S. and international stocks have very high correlations in that they move up and down together. But they also provide diversification in that magnitudes can be quite different. The U.S. market is heavily weighted to large-cap growth tech stocks while international has more value and stocks with a smaller market capitalization. Admittedly, it’s hard to stay invested in international stocks. I’m staying the course with a third of stock funds being international. 

How did the Vanguard ETFs compare to their active peers? Pretty well but not as well as I’d hoped. According to Morningstar, the Vanguard Total Stock ETF (VTI) bested 67% of its peers while the Vanguard Total International (VXUS) only bested 51% of its peers. Regarding the latter, the vast majority of the international peer group also had some U.S. stocks within the fund. The Vanguard Total Bond ETF (BND) bested 66% of its peers which actually exceeded my expectations since it has higher credit quality bonds than most in its peer group. 

And investors are getting it. Not only has indexing overtaken active funds in terms of assets under management but these three index funds are the largest in each category. Across all share classes, Vanguard reports Total US stock Index at $1.5 trillion, total international at $412 billion, and total bond at $314 billion. During the decade, there were many hot funds that attracted billions of dollars but, predictably, investors pulled assets out when performance tanked.

Fixed Income: BND vs TIPS for Core Holding

I can’t even explain why stocks recovered so quickly in 2020 as the pandemic worsened so I’m not going to try to predict the future. I do know that the broadest of the stock index funds, measured correctly, will best others in each respective market. It’s pure arithmetic.

And I know high quality bonds will have less risk than stocks. I’ll continue to have BND as a core holding but with real yields surging, Treasury Inflation Protected Securities (TIPS) are also attractive. I often recommend a TIPS ladder for a higher safe withdrawal rate. There are times when bonds can be better than funds, though lowering interest rate risk is merely an illusion. I’m likely to recommend CDs again when rates are attractive.

It's been a pleasure to write for for over a decade now. Knowing we don’t know the future is a continuing theme as is avoiding hot funds. Investing can simply be defined in eight words: 

Minimizing expenses and emotions; maximizing diversification and discipline. 

I predict that variations from this simple strategy will be hazardous to one’s wealth. But remember that this simple strategy isn’t easy.

Allan Roth is founder of Wealth Logic, an hourly based financial planning and investment advisory firm. He also benchmarks portfolio performance for foundations and other business concerns. Roth's website is You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter